Transports Weekly Snapshot – Broader Markets Retake The Lead
Long only, transportation, Growth, portfolio strategy
The XTN transports is up 4.3 percent; whereas the SPY is up 7.3 percent.
Airlines are a mess; other transport industries have witnessed mixed results leading to less robust stock price growth collectively.
Investors will need to get further queues for 2018 as earnings reports come out.
For the fourth week of 2018 on January 26th, transports were lower led by very poor airline performance. Other sectors including trucking, rail, package delivery and air freight, contract logistics and container shipping were mixed to modestly higher. A theme at the moment remains to be cost inflation. As companies are witnessing stronger top-line growth, the bottom-line may not be improving as much as some had expected. Tax reform will help for sure, but the upcoming contract negotiation period will be key.
Gross domestic product (GDP) growth came in lighter than expected at 2.6 percent versus the 3 percent estimate. We all know that there will be further revisions, which may ultimately get to the previous estimate. Regardless, this was a substantial jump from perf ormance during the fourth quarter of 2016. I remain optimistic that 2018 will see continued economic expansion.
I manage the Lean Long-Term Growth Portfolio (LLGP). To date, performance stood at 4 percent, as highlighted in green. Transports performance continues to fluctuate as broader market indices have retaken the lead I expect transports to continue to be volatile, earnings season has been a testament to this.
The three top performers thus far have now included the Fidelity Contrafund (FCNTX), NASDAQ (IXIC) and Dow Jones Transportation (DJT). Other major indices have become more mixed, with some up over six percent, while others have been within the 4 to 5 percent range.
For 4th week of 2018, the spread between the SPDR S&P 500 ETF (SPY) and the SPDR S&P Transportation ETF (XTN) increased to 3 percentage points with the SPY retaking the lead. The SPY increased by 230-basis points (bps) to 7.3 percent; while the S&P Transportation ETF declined by 130-bps to 4.3 percent for 2018.
Volatility for the S&P Transportation ETF continues to be greater versus the SPY. Last week was strongly impacted as airlines reported results and the market sold off strongly for this group. The volatile and slower start to the year is nothing new. As last year displayed, even a wider disconnect has occurred. With freight and passenger demand remaining robust, I expect transports to have the opportunity to come out on top, just as last year.
Rail operator performance was mostly down for the week, with exceptions being CSX (CSX), Canadian Pacific (CP) and Kansas City Southern (KSU). My top pick for 2018 so far has been spot on with Kansas City in the lead. North America Free Trade Agreement (NAFTA) rail operators with stronger sensitivity to the future of agreement, including Kansas City, Canadian Pacific and Canadian National (CNI) have been mixed thus far with Canadian National being the laggard.
The third week of 2018 saw a return to negative growth YoY (two out of the first three weeks now). The rate of growth declined from the previous week to -2.6 percent from last year. The most recent monthly Class I rail traffic report can be foundhere.
Railcar manufacturers and lessors were mixed for the week, with positive performers including GATX Corporation (GATX), American Railcar Industries (ARII) and Greenbrier Companies (GBX). Railcar manufacturers continue to be weaker versus other peers. GATX continues to trade higher as increasing interest rates are seen as being positive for the companys business model. The company also recently announced a dividend increase and a stock repurchase program.
After seeing the railcar backlog information from GATXs earnings release, it is clear that performance has stagnated, and also that the first quarter of 2017 may have served as the bottom. Just as different supply and demand trends have evolved for container shipping lines, railroads and the trucking industry, railcar manufacturers will need some more time before demand accelerates further.
The majority of truckload carriers were up for the week, weaker performers included Celadon Group (CGI), Daseke (DSKE), Heartland Express (HTLD), Roadrunner Transportation (RRTS) and USA Truck (USAK). Smaller peers have been on fire for nearly a year now so the pullback makes sense. Contract negotiations will be monitored closely as cost inflation has impacted the industry as a whole.
Despite some slowing, trucking stocks are off to a very strong start to 2018, with a good balance of large and smaller peer companies performing well. I continue to be biased towards larger peers for long-term investment strategies, but smaller peers have been some of the strongest performers over the past year. This trend may continue throughout 2018.
Less-than-truckload ((LTL)) carriers were mostly up for the week, with the only exception being Forward Air Corporation (FWRD). I remain cautious on both ArcBest Corporation (ARCB) and YRC Worldwide (YRCW), but with improving market fundamentals, both companies may be able to display improving performance. Regardless, I still expect strongest performance to occur from Old Dominion Freight Lines (ODFL) and Saia (SAIA).
LTL peers continue to display more consistent performance versus truckload peers. Less fragmentation is one reason for this, but overall, I continue to see a bright near-term future for the trucking industry.
Air freight, package and delivery companies were all down for the week, with the worst performer by percentage magnitude decline being Atlas Air Worldwide (AAWW). Some of the volatility was impacted by Germanys Social Democrats Party votes earlier in the week, especially for companies including Atlas Air, Deutsche Post DHL Group (OTCPK:DPSGY) and FedEx Corporation (FDX), with stronger exposure to Europe.
The package delivery and airfreight group has continued being led by United Postal Service (UPS). Not much has changed, as compared with last year, as I still prefer package delivery and air freight companies versus air cargo lessors.
Contract logistics companies were mostly up, with the only exception being Hub Group (HUBG). I wrote a recent article on Hub Group, where I do expect the company to potentially beat revenue estimates. The challenge will be how cost inflation has impacted the business, as to whether an earnings beat is on the table or not. Analysts have been slower to change stock price targets (PT) as these concerns are seeking some clarity for 2018.
With some uncertainty the measured approach from analysts is understandable. Many will be paying attention to the expected increase in contract rates for upcoming bidding seasons. There have been mixed opinions of late with some experts thinking rate increases will more marginal, while others believe double-digit increases may be forthcoming.
For the container shipping industry, last weeks performance was very strong, with the worst performer, Danaos Corporation (DAC) being flat. Charter owners and managers got a boost as Costamares (CMRE) earnings impressed. Global Ship Lease (GSL) and Seaspan Corporation (SSW) rallied strongly as a result. Even Matson (MATX) has witnessed early volatility as well. Overall, it has been a much better start for this group versus last year.
Despite a better start to 2018, there continues to be some uncertainty surrounding capacity for the global container shipping markets. Recent reports have seen major container lines delay newbuild deliveries for certain trade lanes, while others have increased new orders. Based on the information as it stands for today, most are expecting 2018 to see a more positive balance.
Airline stock performance was down strongly for the week with
the only exception being Controladora Vuela Compania de Aviacion (VLRS). Anyone tracking this group knows all too well what happened this past week. Earnings results from United Continental Holdings (UAL) sent shockwaves across the group as price war fears took hold of the markets. Alaska Air Group (ALK), Southwest Airlines (LUV) and JetBlue Airways (JBLU) all reported as well during the week.
Alaska Air continues to be the laggard, which in my opinion, is not justified. The company is making substantial progress with its integration of Virgin America, and management will be cutting capacity growth over the next couple of years, looking to improve cost management, margins and free cash flow growth. I took the liberty to average smaller portions through the week, with my biggest add at $59.50.
Key demand-based indicators that are monitored include Class I rail traffic, trucking industry tonnage, shipments, and loads, air cargo tonnage, container shipping line twenty-foot equivalent units, TEUs, North America seaport TEUs, shipping lane port calls, North America cross-border trade, and freight rates for most of these indicators.
Through the third week of 2018, total traffic was down at -1.6 percent with carload traffic down -4.4 percent, a 110-bps decline; and intermodal traffic up 1.8 percent, being flat. Week one performance declined from the previous week to -2.6 percent, YoY.
These numbers continue to not be far off from the total traffic originated results of -1.7 percent for the third week of 2018 for North America rail traffic,publishedby the Association of American Railroads (AAR) data. Investors should remember that total traffic carried includes both originated and received carloads and intermodal units. Additionally, U.S. traffic was down -2.2 percent and Canadian traffic was down -0.1 percent, closely tracking the carried rail traffic when combined. Mexico traffic was down -0.4 percent, as improvement remained in positive territory.
Container traffic was up 1.3 percent, flat from last week. Domestic intermodal pricing for both eastbound and westbound averages have remained strong of late, with the former up over 22 percent and the latter up nearly 9 percent YoY. Fuel surcharges will continue to be an added catalyst as oil prices remain higher.
The third week of 2018 witnessed weekly coal carload traffic at 103,000 carloads carried. This reflected a -9.1 percent decline versus last year, the sixth consecutive decline. Grain performance was up, at 1.2 percent versus last year. Similar to coal, weekly growth from this point forward will be choppier; this weeks performance snapped twelve consecutive weeks of decline.
Motor vehicles and equipment carload traffic performance was down at -14 percent versus last year; the fourth consecutive weekly decline YoY. Chemicals were down at -5.7 percent, petroleum products were up 3.2 percent for the third consecutive week and crushed stone, gravel and sand, was down at -5 percent.
Source: DAT Solutions,DAT Trendlines
Recent themes for the trucking industry remain, including tax reform reinvestments, the ELD mandate (electronic logging devices) and NAFTA. Of course, an infrastructure bill would be gravy, but finding the funding for the bill will be a challenge. Last week, a preliminary overview was leaked, which mostly depicted a strong expectation for private dollars to match government proceeds.
Class 8 new and used tractor sales remain strong, as do trailer sales. Tonnage and shipments continue to rise, despite this weeks slowing. All of these signs continue to point towards improving economic fundamentals. The lower GDP result for the fourth quarter was not a blow, as the initial estimate will be revised. Regardless, initial growth came in substantially higher from 2016.
Diesel prices were up 17.8 percent for the third week of 2018, reflecting a 70-bps increase from the previous week. Spot market loads were down 3.5 percent from the previous week, while capacity increased by 4.6 percent. With continued increased capacity, dry van, flatbed and reefer rates were marginally lower or flat from the previous week.
Results remain robust for air cargo as new records have been recorded in the Asia-Europe trade lately. All has not been smooth as some shippers have complained regarding delays extending into weeks. Hong Kong set a new record, handling 5.5 million tons during 2017, with YoY growth at over 9 percent. Chinas busiest air cargo terminal, Pactl recorded an increase of more than 12 percent. Seouls airport recorded record growth as well with nearly an 8 percent improvement from 2016. On the Europe front, London Heathrow grew over 10 percent; and Paris Charles de Gaulle was up nearly 3 percent. Frankfurt, Germany saw growth at nearly percent.
UPS will be reporting fourth quarter and full-year results this upcoming week. DHL Group will be reporting later towards March. Both companies will be good reads as to continued global strength. With the strikes in Germany, DHL Group may have struggled a little, but should still have performed well collectively during the quarter.
Source: Alphaliner Top 100 Operated Fleets
Pricing for spot market container rates ended 2017 down for most east-west trade lanes, per the Shanghai Containerized Freight Index (SCFI); exceptions being the Trans-Atlantic. Early in 2018 rates continue to display improvement despite remaining down YoY.
For the fourth week of 2018, Trans-Pacific freight rates have remained down greater than 30 and 23 percent for shipments from Shanghai to the West and East coasts. These current numbers remain elevated from both June and November lows, and have seen a consistent uptrend since December 22 nd although East Coast rates have strengthened more. Asia to Europe rates have declined by greater than 13 percent for North Europe and the Mediterranean. Similar to the Trans-Pacific, rates have improved from late-November 2017. Trans-Atlantic rates have strengthened for both eastbound and westbound services to 11 percent from last year, for the Rotterdam to New York route.
With cryptocurrency and blockchain being the new buzz words, Maersk Shipping has partnered with IBM Corporation (IBM) for its own blockchain deal. The thought process hinges on the need to change as the container shipping industry has been more susceptible to the cycle natures of supply and demand. Blockchain is anticipated to yield decentralized, and more secure transactions, as well as better information exchange. The gist is that the container shipping industry remains antiquated in many respects. Maersk as the global leader is looking for the next leap forward, so that cost efficiency and profitability may become less volatile.
Most all top North America seaports have now reported their December TEU traffic results. Performance has been much more mixed with strong results stemming from Long Beach and Prince Rupert on the West Coast; Charleston, Montreal and Savannah on the East Coast; and Houston and New Orleans on the Gulf Coast. Based on the numbers, I suspect that overall performance will similarly be at or below the 5 percent level like was the case in November 2017.
As has been a recurring topic, the speed and efficiency of moving TEUs from container ships to surface transportation continues to be a focus point for seaports. Long Beach has been working on greater transparency for shippers to access information for inbound container availability for pick up. An appointment system is being used to schedule pick up times, five business days before vessel arrival. The end goal is to cut truck turn times in half, which if accomplished will be a model for others to follow. The most recent monthly North America seaport TEU report is locatedhere.
The iShares MSCI Mexico Capped (EWW) was up 320-bps for the week. The index is leading the iShares MSCI Canada ETF (EWC). The Mexico index is up 9.7 percent for the year versus the 2.3 percent result for the Canadian index; which reflected a 60-bps increase.
The sixth round of NAFTA negotiations kicked off thi
s past week in Montreal, Canada. Both Mexico and Canada indices remain positive, as I would say that there is still a majority that believe a renegotiation will occur rather than a U.S. withdrawal. Only time will tell. If an impasse remains, President Trump has already expressed that an extension could be granted as the Mexico presidential election will be occurring. Deferring the negotiations down the road would presumably reduce short-term uncertainty, but only time will tell.
Broader indices have retaken the lead from transports. As earnings results have come out, certain industries including airlines and rail operators have witnessed weakness. As is typical, select companies in most industries have been weaker as well.
Positive expectations remain for transports through 2018. This is especially true for all major freight industries. I am taking a cautious approach as far as management of the holdings within my portfolio. If markets get weak at any point, better entry levels will likely surface for transports.
Disclosure:I am/we are long ALK, CNI, DPSGY, FDX, GBX, HUBG, JBHT, KSU, MATX, SNDR, TRTN, XPO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editors Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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